How AT&T And Apple Should Handle The iPhone Pricing Backlash

Rita Chang

Jun. 11, 2009, 8:26 AM

iPhone mania is biting back at AT&T.

A stream of online chatter that began shortly after Apple announced that a faster and beefed-up iPhone would hit AT&T June 19 has swelled into an online tsunami of discontent among iPhone users upset that they can't purchase the new iPhone for $199. If they want the new iPhone 3GS, they will need to fork over at least $399 for the entry-level 16-gigabyte model.

The outrage has led to a Twitter petition asking AT&T to "offer reasonable iPhone 3GS upgrade prices." The petition link was re-tweeted dozens of times on any single web page displaying the AT&T-iPhone tweets. As of this afternoon, more than 5,000 people had signed the petition. AT&T did not respond to requests for comment.

Subsidized phones So what's the iPhone's exclusive carrier to do? Of course, many consumers aren't aware that the handsets they buy to go with their service plan are subsidized by the carrier, who hopes to recover that cost by locking subscribers into two-year contracts. The $199 is the subsidized price paid by current 3G iPhone users; AT&T has to pay Apple a subsidy north of $350 for each iPhone it sells, according to some estimates.

Rene Ritchie, editor of theiphoneblog.com, said when he explains the subsidy model to some of the blog's visitors, some invariably soften up and give AT&T an ounce of sympathy while others don't care. Mr. Ritchie notes that many are simply conditioned to the idea of paying under $200 for even the smartest smartphones, thanks to Apple's move last year that set a new floor for the iPhone. "They paid $200 for the iPhone last year," Mr. Ritchie said. "It's an entitlement now."

One quick fix for AT&T is to pound the message that come next Wednesday, users can update their phones with the new -- and free -- iPhone software that will have many of the new iPhone's bells and whistles, including cut-and-paste functions, multimedia-messaging support and wider search capabilities across e-mails and notes.

"They should remind their customers that phones that are 1 or 2 years old are getting a new operating system with most of the new features that are in the new iPhone," counseled Michael Gartenberg, VP-strategy and analysis at Interpret.